Stock to Watch: Asian Citrus Holdings

Since I drew attention last March, shares in Asian Citrus Holdings have fallen about 20% from 73.5p to 58p - and under a disciplined stop-loss approach this should prompt consideration why. Some traders would argue such a fall should prompt a sale, don't get entangled in details, however AIM shares are prone to be more volatile and stop loss levels (Asian Citrus Holdings traded at 85p in January) are subjective.

So is China's largest orange plantation owner and operator becoming riskier or more attractive?

I previously cited two key macro factors: demand for fresh fruit and juice from China's emerging middle class; and the double-edged sword of rising food prices where Asian Citrus Holdings has benefited, but where there is a risk that oranges price themselves out of an element of the population that may be needed to achieve superior growth.

On 14 June, Chinese officials announced that inflation had reached 5.5%, the highest figure for 34 months.

Indeed it is being driven by food prices, annualised at 11.7% compared with 2.9% for non-food goods. Ruined crops and higher meat prices are involved, although Asian Citrus Holdings has also struck a double-digit price increase. The inflationary trend looks ingrained given China's very rapid monetary expansion, with food price inflation also being imported to some extent. More positively, long-term shifts in dietary patterns are significant too, towards Western items such as fresh fruit/juices.

With regard to the big picture, however, Asian's shares have been falling amid concerns how Greece's financial dilemmas can be rectified; the factor of international contagion.

If tricky to pinpoint genuine economic negatives, the Asian Citrus Holdings directors' recent share buying speaks value.

The chairman/chief executive has bought 200,000 shares on the Hong Kong market at an equivalent price of 58.36p. Since he owns over 275 million or 22.65%, it could be interpreted as an attempt to bolster confidence, yet other directors have been buying materially too. On 1 March, an executive director bought 122,000 shares at 70.87p equivalent, to own 439,000; and a non-executive director bought a chunky 400,000 shares at 73.4p to own 450,000. While the market trend shows directors' dealings are not a dependable guide to market value in the near term, at least the Asian Citrus Holdings directors show confidence in intrinsic value.

The end-December 2010 balance sheet showed Asian Citrus Holdings had about £280 million cash (at current exchange rates) in context of about £670 million net assets; was low on goodwill/intangibles and had only modest liabilities. There is no debt and the current ratio (of current assets to current liabilities) was an ample 3.3 times at end-year. Considering such a strong balance sheet with a net asset value of 54.5p a share it is interesting how market price has fallen quite close to this.

On 13 June, Asian Citrus Holdings confirmed latest production for the summer orange crop involving a 1.1% like-for-like rise, which was in line with a March trading statement, albeit with annual production up 16%. An average 10% increase in selling price for the summer crop was also confirmed in March. At least the company is not currently drifting in inflation-adjusted terms.

Possibly Asian Citrus Holdings shares are suffering from an aspect of controversy related to the accounts of quite similar Chinese companies.

Chaoda Modern Agriculture, a Chinese vegetable producer which owns about 23% of Asian Citrus Holdings, was challenged by the weekly Next Magazine that it had over-stated its land holdings; however analysts from the Macquarie banking group investigated the matter using global satellite positioning and other technology, to confirm the plantations' size. Coincidentally a short selling raid on Sino-Forest Corp, a Chinese tree plantation owner, has alleged timber holdings have been over-stated; this company has also missed earnings estimates. Sino-Forest is putting up a robust defence although confidence has taken a hit in jittery markets.

Yet the Asian Citrus Holdings directors should know what they are doing, buying significant amounts of shares at higher prices than today; there would seem to be a low risk of accounting oddities emerging here.

Seymour Pierce, Asian Citrus Holdings's nominated adviser and broker, has projected pre-tax profit of about £47 million and earnings per share of 4.4p for the current financial year to end-June, rising to £64.7 million and 5.3p respectively for 2011/12. If this is realistic, then the prospective P/E multiple is reducing from the mid to low teens, for a company growing earnings at about 20%.

Despite risks with Chinese inflation, which may prompt social instability, Asian Citrus Holdings's profile of a modest price-earnings rating and good asset backing - supported by the directors' share buying - makes its fall in share price from an 80p range, look more interesting.

So I do not think a stop-loss approach is justified here; more likely, Asian Citrus Holdings shares are going through a volatile patch with Asian shares being hit generally by wider financial woes.

The 2010/11 prelims are confirmed as due in September rather than October last year when there was no pre-closed period statement. So it seems unlikely that Asian Citrus Holdings will update investors further before then.

Chart-wise, the shares look to have retraced to a 'support' line joined from about 20p in July 2009, to a low 40p area a year later. I am sceptical about such sophistry but chartists may like to take a closer look. Investors' enthusiasm appears to have been overdone via the rally from about 50p near 90p last autumn, given the see-saw trend drifting back.

There is no sign yet of any firm chart reversal, you are looking at a drifting share, but it is no falling knife.